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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
An index, when used with respect to financial markets, is a statistical measure of change in a securities market. Indexes, or indices (both are correct in American English), are imaginary portfolios of securities (usually stocks) representing a particular market or a portion of it.
This is the chart for the Dow Jones Industrial Average. Scroll down for a list of major world indices on Wikinvest.
Generally, an index has three main purposes:
- An Index shows the performance of a basket of equities instead of just a single equity - IE an index is diversified.
- An index can show the performance of a particular class of assets - for example, a biotechnology index would show the performance of a diverse group of biotech companies over time.
- An index can also be used to provide a generic securities category for passive management and derivatives (passive investing).
Each index is calculated using its own methodology, and its value is expressed in terms of a change from an original base value. So the numerical value of an index is not as significant as the percent change in the index.
Investing in indexes is a way to invest in the performance of a broad market sector, or in the market as a whole. But to trade an index, an investor must buy or sell through a third party. Stock and bond market indexes are used to make mutual funds and exchange-traded funds (ETFs) that mirror the performance of the index.
When investing in an Exchange Traded Funds that tracks an index, an investor buys or sells an entire group of stocks when trading that particular ETF - an example is the StreetTRACKS Dow Jones Global Titans Index Fund (DGT). Some indexes allow investors to put money into commodities - an example is the PowerShares DB Commodity Index Tracking Fund (DBC) - while others, like the Baltic Dry Index (BDI), are important economic indicators used to measure the rates under which services are sold in a particular industry (in the case of the BDI, dry bulk shipping). Still others are forward looking, measuring the anticipated volatility of the markets - an example is the Nasdaq Volatility Index (VXN).
Major World Indices on Wikinvest
- For more information on how indices are calculated, see how stock indices work.
- For a complete indices list, see the list of indices on Wikinvest.
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